From time to time, most people need some assistance with their finances. That need for aid might come as a result of a job loss, excessive medical bills or some form of household emergency. During those trying times, loans are often sought to help bridge the financial divide. The problem though, is that loan approvals are often more difficult to come by for some people than others. As a result, it is easy for people in a financial bind to fall prey to predatory lenders and their less than ethical practices.
Learning to protect yourself from these types of lenders and their practices can help you keep your financial future on track.
What is Predatory Lending?
Predatory lending occurs when a lender places unfair and even abusive terms on a borrower. While there is no exact definition for the name, these are often loans designed to force borrowers to default or go deeper in debt as they try to extricate themselves from the predatory loan terms.
Predatory loans allow the lender to make as much money up front as possible with little regard for the borrower’s ability to repay the debt or recover from the financial mess it creates.
Predatory Lending Practices
Many lending practices identify a lender as a potentially predatory lender. If your lender employs any of these tactics, you might want to consider seeking assistance elsewhere.
- Employing bait and switch interest rates. These lenders like to lure you in promising below-market interest rates that appear too good to be true. However, once you are ready to sign for the loan, they will inform you that you were unable to qualify for the advertised low rate and try to convince you to sign up for a higher rate loan.
- Using high-pressure sales tactics. Predatory lenders will engage in high-pressure tactics to get you to make the deal now. They do not want you to have time to think about the loan and give it careful consideration. Instead, they encourage you to sign right away, often before you even have a chance to fully understand the loan agreement's terms.
- Encouraging you to borrow more than you ask for. That was a common practice among predatory mortgage lenders before the housing crash of 2007-2008. They encouraged things like taking out interest-only loans with end-of-term balloon payments or adjustable rate mortgages that favor the lender rather than the borrower. If lenders try to push you into taking a riskier loan, walk away. They are not acting in your interests at all.
- Requiring no credit check or telling you not to worry about credit. Your credit history shows your propensity for repaying a loan and is a huge indicator with most lenders about your repayment capabilities. Lenders who do not concern themselves with your credit score are not concerned about your ability to repay the loan. Instead, they are only worried about what they can get from you.
Protecting Yourself
Protecting yourself from predatory lending practices is easy once you are on the lookout for their tell-tale signs. There are a few things you can do that will help you see them coming so you can completely steer clear of them.
- Compare loan terms between multiple lenders. Working with multiple lenders and reviewing each's terms will help you identify items that appear troublesome or out of the ordinary. You want to work with a lender that fits best within your financial and personal comfort zones and who is looking out for your financial well-being.
- Avoid loans that have balloon payments. These types of loans almost never end well.
- Get all the facts about the loan before you sign. More importantly, make sure you understand them.
- If possible, always sleep on it a few days before accepting the terms. That gives you time to consider the loan's impact before making your final decision.
- Resist being talked into a loan you did not ask for. That includes terms, loan amounts, and types of loans.
- Know your financial situation and avoid loans with excessive interest rates you cannot afford to pay. The better you understand your means and abilities to repay the loan, the less likely you are to be talked into a loan that is doomed to cause you financial hardship down the road.
- Work with trustworthy lenders. Trustworthy lenders are less likely to engage in predatory lending practices and will work with you to find a loan you can comfortably repay.
Protecting your financial interests by avoiding predatory lenders and loans can yield a reward in the long term even if means you do not get the loan you are seeking today to provide immediate relief.